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Question
The Clearwater National Bank is planning to set up a new branch. This new branch is anticipated to generate 5 percent of the total business of the bank after it is opened. The bank also expects the return for this branch to be 15 percent with a standard deviation of 5 percent. Currently the bank has a 10 percent rate of return with a standard deviation of 5 percent. The correlation between the bank's current return and returns on the new branch is expected to be -0.3. In this problem, the proposed new branch _______ overall risk exposure due to ______ effect.
A. increases; economies of scale
B. increases; economies of scope
C. reduces; convergence
D. reduces; geographical diversification
E. none of the options are correct
Answer
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